Diageo Plc is set to buy a controlling stake in Indian liquor baron Vijay Mallya's United Spirits Ltd in a deal worth over $2 billion, a memo shows, giving the world's biggest spirits group a bigger slice of a fast-growing market.
The purchase would be the biggest inbound Indian M&A deal since British oil firm Cairn Energy Plc's sold a majority stake in its Indian business to Vedanta Resources Plc last year. The Diageo deal concludes an on-again, off-again courtship that began in 2008.
The deal is expected to be announced after the close of Indian stock markets on Friday, according to the internal memo detailing the transaction obtained by Reuters.
Under the terms of the deal, Diageo would eventually get a 53.4 percent stake in United Spirits, although Mallya would remain as chairman and retain a material shareholding which the memo did not specify.
A United Spirits spokesman did not respond to calls seeking comment, while Diageo officials were not available for comment.
The agreement comes after months of haggling and will ramp up Diageo's presence in the world's largest whisky market. The deal would also help Mallya gain much-needed cash to reduce the debt borned by United Spirits and free up funds to revive his grounded Kingfisher Airlines Ltd.
"Some of the Mallya group companies have been in turbulence for some time. This is his final opportunity to revive the fortune of the group," said Jagannadham Thunuguntla, head of research at SMC Investments and Advisors Ltd in New Delhi.
Shares in Mallya-controlled companies rose after the Reuters story, with Kingfisher gaining 4.7%. United Spirit was up 1.5 percent and United Breweries Holdings Ltd was 2.6% higher. By contrast, the benchmark Bombay share index fell 1%.
The two companies said in September that they were in talks about a possible deal.
Diageo, the maker of brands including Johnnie Walker whisky, Guinness beer and Smirnoff vodka, held talks with United Spirits in 2008 that collapsed the following year.
Mallya has been scrambling for nearly a year to raise funds for Kingfisher, prompting speculation that he may offload a stake in United Spirits or United Breweries, the maker of Kingfisher beer.
"At this moment, Kingfisher may be a difficult cause to revive. As other UB group companies are also quite overleveraged, I think they will prioritize restructuring other group companies ahead of Kingfisher," Thunuguntla said.
Shares in United Spirits have nearly tripled this year, with much of the gains coming in the past four months amid market talk about a possible deal with Diageo.
Diageo is expanding into fast-growing emerging markets with recent acquisitions in Brazil, China and Turkey and expects half of its turnover to come from these markets by 2015 compared to nearly 40% currently.
Shares in Diageo were up 0.3% in London trading.
(Additional reporting by Elzio Barreto in Hong Kong, Indulal P.M. in Mumbai and Anjuli Davies in London; Writing by Denny Thomas; Editing by David Goodman and Ryan Woo)